It's Tax Day, meaning that those who procrastinated spent their weekends trying to work through our overly-complex tax code. The federal code contains nearly four million words and the IRS's Taxpayer Advocate estimates that businesses and individuals spend nearly 6.1 billion hours a year completing their filings.
Getting Congress to take on tax reform will be difficult, but the two lawmakers in charge of the tax-writing committees seem to be committed to reforming our nation's inefficient and overly-complicated tax code.
It is well known that the corporate tax code is littered with tax provisions that cost the government revenue. Today, the U.S. has the highest top marginal rate in the world, discouraging growth and investment, and a complex corporate code that diverts resources from more productive purposes and creates disincentives. While some tax provisions may be serving a legitimate purpose, there are others that provide spillovers beyond lawmakers' original intent.
Yesterday, House Ways and Means Committee Chairman Dave Camp (R-MI) took a hard look at the deduction for state and local income taxes at a hearing on tax expenditures that affect state and local governments.
Tax expenditures are a frequent subject of this blog, as they are less visible than government spending due to the tax code's great complexity. But these provisions are costly, estimated at $1.3 trillion in forgone revenue in 2013 by the Joint Committee on Taxation, and should be better seen as government spending. However, due to the progressiveness of the tax code, most tax expenditures especially benefit upper income taxpayers.
Tax expenditures have been a hot topic lately as a way to raise additional revenue for a deficit reduction plan that could replace sequestration. Recently, Sen. John McCain (R-AZ) said he would be willing to consider several "revenue closers" (or tax expenditures) in a compromise, and reforming tax expenditures has been proposed by the White House as well.
One of the lesser known provisions of the American Taxpayer Relief Act is the extension of the refundable American Opportunity Tax Credit (AOTC) through 2017. The AOTC was created in the 2009 stimulus to replace the non-refundable Hope Credit, and provides a tax credit equal to spending on tuition, up to $2,500.
Update: The link to the JCT report has been fixed.
Yesterday, CBO issued a report on refundable tax credits, examining many issues involved with the credits. The first refundable credit, the Earned Income Tax Credit, was created in 1975 to offset the payroll tax for low-income people. The number of refundable credits has increased to a high of 11 different credits in 2010, and 5 currently. The cost of these tax expenditures has also risen, reaching a high of $238 billion (in 2013 dollars) in 2008 due to many economic stimulus measures before falling to $150 billion this year.
The complexity of our tax code has many advocates making the case for tax reform as we head toward the second round of fiscal negotiations.